25th May 2016
Remain and Leave camps’ introspective approach to the referendum is a mistake and we must consider what really is at stake, says Rowan Dartington Signature’s managing director Guy Stephens.
The investment manager argues that those investors who are most fearful about Brexit may have already sold out of what they would see as risky position.
But many, faced with huge amounts of confusing information are sitting tight.
He says: “It is increasingly becoming obvious that if we do choose to exit the EU, we will see a major market shock as this outcome is not currently priced in.”
Stephens says: “It is very easy to get caught up in the plethora of short-term noise we have in markets today, thanks to 24/7 analysis and social media. News is circulated the moment it breaks as someone somewhere in the world will be awake and able to spread the word. The advent of the internet and the explosion in social media has been one of the greatest advances in communication and democratic transparency known to man but with it comes the risk of information overload.
“A vital part of today’s investor skill set is the ability to sift through all the noise and drill down into what is important and relevant. There is more information to analyse on any subject than there is time available and so time-efficient identification of the key variables ahead of making an investment decision is key to avoid perpetual indecision and paralysis.
He believes the current Brexit campaign is a case in point. “Both sides are ramping up their campaign this week now that the local elections, including the London Mayor, are out of the way. Boris Johnson is coming to a hustings near you! As with all electoral campaigns, the politicians love doing what comes easiest to them – talking and a lot of it. Much of the public have already become jaundiced with the whole affair and bored with the debate as no-one knows what or whom to believe. The various claims and counter-claims are impossible to verify, with any statement from either side being immediately countered with a supposedly correct fact.”
“We have not yet encountered either side agreeing on anything. The whole debate is centred around disagreeing with the other side on every issue. This means that it is virtually impossible for the poor voter to know where the common ground is and what is factually correct. This spells utter confusion and probably shifts the outcome to the status quo because when human beings are faced with a choice of leap or do nothing in the face of significant factual uncertainty, they tend to default to ‘better the devil you know’.”
Stephens says this is also true in investment markets when examining the behaviour of the private investor.
“When faced with uncertainty and fear, there is an overwhelming tendency to sit tight and do nothing rather than take the plunge, which feels like a risky gamble which could go horribly wrong. If the Brexit debate continues in this way, a confused public will most likely vote for the status quo as why take a risk when we have full employment, economic growth and relative prosperity?
“Coming back to the bigger picture, with all this focus on Brexit, this now appears to be an event of global importance and featuring in the strategic missives of international economic commentators. It is increasingly becoming obvious that if we do choose to exit the EU, we will see a major market shock as this outcome is not currently priced in. That said, if we do vote to remain, then there are a number of sectors that are currently depressed ahead of uncertainty around the outcome. This creates opportunity but not without risks of course.
“The natural reaction of investors is to stand back and await the outcome. However, we should not ignore the fact that the FTSE-100 is still over 13% below the all-time high achieved in April 2015 and yields an average of 4%. The alternatives available either yield less, significantly less in the case of investable fixed interest and cash, or look increasingly expensive in the case of some areas of commercial property. The risk/return relationship for equities does rather argue against being underweight when the alternatives are relatively unattractive.”